Warehouse Sales Pty Ltd (in liq) & Lewis and Templeton v LG Electronics Australia Pty Ltd & Ors [2014] VSC 644

Supreme Court of Victoria|2014-12-17|Before: SIFRIS J

SECURITIES - Personal Property Securities Act 2009 (Cth) ('PPSA') - Sale of goods by various suppliers - Sale subject to retention of title provisions - Whether suppliers have a personal property security interest in goods - Whether security interest extends to third parties - Whether security interest is extinguished by sale in the ordinary course of business - Whether sale to a subsidiary is in the ordinary course of business.

Goods Act 1958 (Vic) - Whether Goods Act applies to PPSA - Goods Act 1958 (Vic) s 3, s 6, s 21, s 22, s 23.

1 The critical issue in this case is whether various suppliers, including the defendants ("the Suppliers") retain a security interest in goods sold, subject to the usual retention of title clauses, to Warehouse Sales Pty Ltd ("WHS"), now in liquidation, in circumstances where some of the goods were on-sold or transferred to a subsidiary of WHS, WHS2 Pty Ltd ("WHS2"), also in liquidation. WHS2 has sold some of the goods to its retail customers and the unsold goods remain in its possession. WHS also remains in possession of some of the goods. There are other related issues in the case as referred to below.

2 Being unsure as to whether the security interests of the Suppliers attached to the goods in the possession of WHS2 (and WHS), Darren Michael Lewis and Damian John Templeton, the liquidators of WHS and WHS2 ("the Liquidators"), properly commenced this proceeding initially seeking judicial advice under s 511 of the Corporations Act 2001 (Cth).

3 On 21 March 2014, the Suppliers were joined as defendants. The Liquidators properly put forward the various scenarios and alternatives and the Suppliers effectively became contradictors.

4 On 21 March 2014, the Director of Consumer Affairs Victoria was given leave to appear as a friend of the Court.

5 On 28 July 2014, Ferguson J (as her Honour then was) formulated five preliminary questions for determination. The questions are as follows:

Who was the owner, at the date of the liquidators' appointments, of stock located at the Wodonga store operated by WHS2 ("the Wodonga Stock")?[1]
If WHS2 was the owner of the Wodonga Stock at the date of the appointments, then:

(a) did any security interest under the PPSA that had been granted by WHS to the supplier of that stock continue in that stock pursuant to s 32(1)(a) of the PPSA; and

(b) if so, did WHS2 take the property free of that security interest pursuant to s 46 of the PPSA?[2]

Are the liquidators justified in determining that where stock supplied to WHS had, in the period prior to the liquidators' appointment, been identified or appropriated to a sales contract with a customer of WHS or WHS2, that customer is entitled to take the stock free of any security interest pursuant to s 32 or s 46 of the PPSA?[3]
Are the liquidators justified in deducting their reasonable costs of realisation of pre-appointment book debts of WHS prior to distributing the proceeds derived from those pre-appointment book debts?[4]
Are the plaintiffs justified in deducting their reasonable costs of realisation of stock sold via a sales contract described in question 3 prior to distributing any part of the proceeds of that stock to the holder of any security interest over that stock?[5]

6 WHS carried on a business of selling white and brown goods[6] that it obtained from the Suppliers (and others) through stores in Victoria. WHS2 is a related or subsidiary company of WHS that operated a store also selling white (and brown) goods in Wodonga ("the Wodonga store").

7 Various white goods which were purchased from the Suppliers, were in the possession of WHS and WHS2 at the time the Liquidators were appointed ("the Goods").

8 The Suppliers supplied the Goods on credit to WHS. There was no contractual relationship between the Suppliers and WHS2 and all purchases of the Goods from the Suppliers were purchases by WHS.

9 However, staff from WHS2's Wodonga store placed orders for stock directly with the Suppliers (with the approval of a head office employee of WHS) and the stock was delivered directly to the Wodonga store by the Suppliers. From time to time Goods were also transferred between stores.

10 The Goods were supplied under retention of title terms. These terms provided that ownership in the Goods remained with each Supplier until the Goods were paid for in full or until all debts owing by WHS to each Supplier were paid for in full. These agreements also set out the terms of WHS' right to dispose of the Goods in the ordinary course of business.

11 Extracts of some of the relevant terms of these agreements are as follows:

Electrolux Terms and Conditions of Sale Clause 6

(a) Ownership of the Products remains with the Supplier until the Customer has paid all indebtedness on an all monies basis to the Supplier on any account whatsoever...(d) The Customer shall be at liberty to sell the products subject to the condition that until payment has been made to the Supplier, the Customer shall sell as an agent and bailee for the Supplier.

Panasonic Australia Pty Ltd Terms and Conditions of Sale Clause 2

(a) Property in the Goods does not pass to the Buyer until such time as payment in full for the Goods shall have been made and no other money is owing by the Buyer to Panasonic on any account whatever and whether or not such other money has become due for payment...(b) The Buyer has the right to dispose of the Goods in the course of business for the account of Panasonic and pass good title in the Goods to its purchasers being bona fide consumers for value without notice of the rights of Panasonic. Sale of the Goods to a third party for further resale is not permitted unless the Buyer and Panasonic have entered into a current distribution Agreement.

LG Electronics Australia Standard Trading Terms Clause 4

Title and Risk. Title in the goods delivered by LGEAP to the customer (Goods) passes to the customer on payment to LGEAP, in full, of all sums owing to LFEAP by the customer whether under this or any other agreement... iii) subject to this clause 4 and clause 18, the customer may sell the Goods in the ordinary course of its business provided that the entire proceeds of sale or any other proceeds arising from the Goods or an insurance claim regarding the Goods are held in a separate account in trust for LGEAP.

Shriro Australia Pty Limited Terms & Conditions Clause 8

You do not own any of our product in your possession until all of our product you have purchased from us at any time and all other amounts owing by you to us on any account have been paid for in full... If you wish, you may promote and on-sell product in the ordinary course of business even if ownership of our product has not passed to you.

SMEG Terms and Conditions Clauses 37 and 39

37. Whilst the Applicant has not paid for the goods supplied in full at any time, the Applicant agrees that property and title in the goods shall not pass to the Applicant and the Supplier retains the legal and equitable title in those goods supplied and not yet sold.

39. The Applicant shall be entitled to sell the goods in the ordinary course of its business, but until full payment for the goods has been made to the Supplier, the Applicant shall sell as agent and bailee for the Supplier and the proceeds of sale of the goods shall be held by the Applicant on trust for the Supplier absolutely.

12 The Suppliers registered security interests over the Goods, including purchase money security interests and interests over all present and after acquired property of WHS, on the Personal Property Securities Register ("PPSR").

13 Retail customers who purchased the Goods from WHS and WHS2 did so pursuant to different types of arrangements which included:

(a) customers who bought the Goods and paid in cash upon delivery of those Goods;

(b) customers who bought the Goods and paid cash before receiving the Goods; and

(c) customers who bought the Goods pursuant to layby agreements.

Pursuant to these agreements some of the customers had paid for the Goods in full, others had only paid in part and others had not paid for them at all. Of those who had paid in full, some had not collected the Goods.

14 WHS and WHS2 have the same directors, John Robert Wipfli and David Norman Wilkinson.

15 WHS owns 80% of the issued shares in WHS2 with the remaining 20% owned by Anthony Michael Cowan, the general manager of the Wodonga store.

16 There was a sublease between WHS and WHS2 for the Wodonga store, pursuant to which WHS2 paid WHS rent.

17 The staff of the Wodonga store were paid by WHS although WHS2's ABN was on the group certificates issued to them.

18 There was a running account between WHS and WHS2 which recorded stock which was supplied by WHS to WHS2 (at cost price less supplier rebates and commissions) for sale in its Wodonga store. WHS issued monthly statements which were called 'tax invoice and statement' to WHS2 recording amounts payable for stock, rent and the staff salaries.

19 WHS2 transferred amounts from its bank account to WHS' bank account as and when funds were available, this occurred almost daily and was reflected in the changing debit balance of the running account.

20 At the time the Liquidators were appointed, the amount WHS2 owed WHS as evidenced by this running account was approximately $2.1 million.

21 The Goods which were held at the Wodonga store were recorded as assets of WHS2 in WHS2's books.

22 When the Goods were sold at the Wodonga store, the customer was issued with an invoice which bore the name and ACN of WHS but also included the name and ABN of WHS2. The proceeds of these sales were banked into WHS2's own bank account.

23 WHS also supplied white goods it ordered from the Suppliers to Brotherhood of St Laurence, Jayco Caravans Pty Ltd and various insurance companies at a wholesale or discounted margin (that is at a discount to the usual retail margin).

24 Similarly, WHS supplied white goods it ordered from the Suppliers without making any profit, to Spendless Buying Advisory Services Pty Ltd and Jack Abell Pty Ltd, which are both companies associated with one of the directors of WHS, David Wilkinson.

25 WHS also supplied white goods without making any profit to Employee Sales Pty Ltd which is also a subsidiary of WHS and which shares the same directors as WHS.

26 The goods were supplied regularly from WHS to Jack Abell Pty Ltd, Spendless Buying Advisory Services Pty Ltd and Employee Sales Pty Ltd, and the sales in each calendar month were recorded on monthly invoices.

27 This Proceeding requires the Court to address a number of novel points of law that arise in the context of the recently enacted Personal Property Securities Act 2009 ("PPSA"). The PPSA, which implements significant and far reaching changes to Australian finance law, represents a paradigm shift from established principles of secured transactions law that developed over many years in relation to security over personal property.

28 Personal property has for centuries been used to secure obligations. However the nature and form of security has varied because of the different characteristics of personal property used as security. Secured interests have been granted to creditors pursuant to mortgages, charges, bills of sale and pledges.

29 The laudable aim of the PPSA is to provide a simplified unified, coherent and comprehensive regime relating to security over personal property.

30 Key features of the PPSA include the unitary concept of a security interest and a priority regime determined by the registration of such interests. A security interest, registered in time, will prevail against a grantor and third parties in possession of the personal property (called collateral) notwithstanding their apparent ownership. However, bona fide purchasers for value without notice may fall under the buyer protection provisions in the PPSA. These provisions seek to achieve a balance between the interests of the secured party and an innocent buyer.

31 The United States of America established a regime under the Uniform Commercial Code that created the unitary concept of a 'security interest'. This regime, known as Article 9, enabled the establishment of a uniform set of priority rules, transferee rules and remedies, together with a registration system for all security interests over personal property whether given by a corporation or an individual.

32 The concept of the 'security interest' assimilates or re-characterizes all types of security interest, including retention of title arrangements, to a simple concept where the purpose and economic effect is essentially the same.

33 A modified Article 9 type regime was enacted by the Canadian provinces, New Zealand and most recently in Australia. Canada has two basic versions of the Article 9 type regime. These are the Saskatchewan model and the Ontario model. These two models differ in a number of important respects. It is important to appreciate this when considering the case law of these two jurisdictions.

34 The PPSA is a modification of the Saskatchewan model that was adopted in New Zealand. The PPSA incorporates a number of significant changes brought about by the 1999 Revision of Article 9. The drafting style and policy choices in the PPSA differ in many respects from that of Saskatchewan, New Zealand and Article 9 type regimes.

35 It is important to appreciate that the PPSA is not a code. Section 254 of the PPSA provides that it is to operate concurrently with the laws of the Commonwealth, State and Territory law and the general law. Certain Federal laws are said to prevail over the PPSA and these include the Cheques Act 1986 (Cth), the Bills of Exchange Act 1909 (Cth) and the Payment Systems and Netting Act 1998 (Cth).[7]

36 The PPSA provides that a security agreement which usually creates the security interest is enforceable according to its terms: s 18(1). This section is subject to the laws of the Commonwealth, State and Territory law and the general law. There is no provision in any Victorian statute such as is found in section 23 of the Sale of Goods Act 1908 (NZ) which provides that '. . . nothing in this Act shall affect. . . (c) the provisions of the Personal Property Securities Act 1999' or in the Sale of Goods Act 1923 (NSW) s 26(2) that states '[n]othing in this Act shall affect: (a) . . . of the Personal Property Securities Act 2009 of the Commonwealth . . .'.

37 The PPSA provides for a priority regime, not a title regime. Under s 273 of the PPSA ownership or title to personal property is not determinative and as a consequence a retention of title ("ROT") financier's ownership interest is replaced by a simple security interest.[8] A ROT supplier must protect that 'security interest' by taking possession of the personal property (e.g. a pledge under pre-PPSA law) or by obtaining a signed security agreement that covers (describes the collateral) and perfecting[9] that security interest by registration of a financing statement on the PPSR.[10] The consequences of non-perfection are that the security interest is ineffective against third parties,[11] and on insolvency a security interest (title) vests in an administrator or liquidator.[12] In other words, it is ineffective in the event of insolvency.

38 Because the ownership or title interest is merely a security interest, non-perfection also results in loss of priority because of PPSA s 55. A further consequence is that a transferee or buyer can take free of the security interest such as under s 43 because of non-registration and, also, under s 46 which provides that a buyer (transferee) takes free of a security interest given by the seller who sells personal property (mainly inventory) in the ordinary course of business of selling personal property of that kind. This is similar to but not the same as the idea of extinguishment under the old Chattel Securities Act 1987 (Vic).

39 A buyer can also take free of a security interest given by a seller in circumstances where the ROT supplier's security agreement (supply agreement) authorises the sale of inventory in the ordinary course of the buyer's business: s 32(1) PPSA. This authorisation is equivalent to the concept of the floating charge whereby the chargor could, until crystallization, sell inventory in the ordinary course of business free of the charge.

40 Under the old law, inventory and book debts from the sale of personal property owned by the chargor were floating charge assets (circulating assets) and were thus available on insolvency to pay priority creditors. Retention of title assets were not available to a liquidator as they were not assets of the insolvent entity.

41 Section 20 of the PPSA relates to the enforceability of security interests against third parties. It relevantly provides:

General rule

(1) A security interest is enforceable against a third party in respect of particular collateral only if:

(a) the security interest is attached to the collateral; and

(b) one of the following applies:

(i) the secured party possesses the collateral;

(ii) the secured party has perfected the security interest by control;

(iii) a security agreement that provides for the security interest covers the collateral in accordance with subsection (2).

Note: For possession and control of collateral, see Part 2.3.

Written security agreements

(2) A security agreement covers collateral in accordance with this subsection if:

(a) the security agreement is evidenced by writing that is:

(i) signed by the grantor (see subsection (3)); or

(ii) adopted or accepted by the grantor by an act, or omission, that reasonably appears to be done with the intention of adopting or accepting the writing; and

(b) the writing evidencing the agreement contains:

(i) a description of the particular collateral, subject to subsections (4) and (5); or

(ii) a statement that a security interest is taken in all of the grantor's present and after-acquired property; or

(iii) a statement that a security interest is taken in all of the grantor's present and after-acquired property except specified items or classes of personal property.

(3) Without limiting subparagraph (2)(a)(i), for the purposes of that subparagraph a grantor is taken to sign writing if, with the intention of identifying the grantor and adopting, or accepting, the writing, the person applies:

(a) writing (including a symbol) executed or otherwise adopted by the person; or

(b) writing wholly or partly encrypted, or otherwise processed, by the person.

Note: For the meaning of writing, see section 10.

Personal property descriptions--consumer property, equipment and inventory

(4) If particular personal property is described using the term "consumer property" or "commercial property" in the writing evidencing a security agreement, subparagraph (2)(b)(i) is satisfied only if the personal property is more particularly described, in addition, by reference to item or class.

(5) If particular personal property is described using the term "inventory" in the writing evidencing a security agreement, subparagraph (2)(b)(i) is satisfied only while the personal property is held or leased by the grantor as inventory.

Proceeds

(6) A security interest in proceeds is enforceable against a third party whether or not the security agreement providing for the security interest contains a description of the proceeds.

Note: Section 32 deals with whether a security interest in collateral attaches to proceeds of the collateral.

By starting with the presumption that a security agreement is effective against third parties (provided the formalities required by the Act have been complied with), it is clear that a secured party will prevail over a buyer unless the buyer comes squarely within one of the buyer protection provisions.

43 The first relevant buyer protection provision is s 32. So far as is relevant, PPSA s 32 (including its legislative note[14]) reads:

(1) Subject to this Act, if collateral gives rise to proceeds (by being dealt with or otherwise), the security interest:

(i) the secured party expressly or impliedly authorised a disposal giving rise to the proceeds; or

(ii) the secured party expressly or impliedly agreed that a dealing giving rise to the proceeds would extinguish the security interest; and

(b) attaches to the proceeds, unless the security agreement provides otherwise.

Note 1: The effect of paragraph (a) is to extinguish the security interest in the collateral if the secured party expressly or impliedly authorised the dealing mentioned.

44 'Collateral' is defined in the PPSA dictionary (s 10) as follows:

Collateral:

(a) means personal property to which a security interest is attached; and

(b) in relation to a registration with respect to a security interest includes personal property described by the registration (whether or not a security interest is attached to the property).

45 An expansive definition of 'proceeds' is found in PPSA s 31. Relevantly, that section provides as follows:

Proceeds of collateral to which a security interest is (or is to be) attached means identifiable or traceable personal property of the following types, subject to subsections (2) and (3):

(a) personal property that is derived directly or indirectly from a dealing with the collateral (or proceeds of the collateral); ...

46 The second relevant buyer protection provision is s 46. Section 46 is in the following terms:

Taking personal property free of security interest in ordinary course of business

Main rule

(1) A buyer or lessee of personal property takes the personal property free of a security interest given by the seller or lessor, or that arises under section 32 (proceeds - attachment), if the personal property was sold or leased in the ordinary course of the seller's or lessor's business of selling or leasing personal property of that kind.

Exceptions

(2) Subsection (1) does not apply if:

(a) in a case in which personal property of that kind may, or must, be described by serial number - the buyer or lessee holds the personal property:

(i) as inventory; or

(ii) on behalf of a person who would hold the collateral as inventory; or

(b) in any case - the buyer or lessee buys or leases the personal property with actual knowledge that the sale or lease constitutes a breach of the security agreement that provides for the security interest.

47 As referred to earlier, the PPSA is not a code. Accordingly, in my opinion, and for reasons referred to below, there is no reason why sale of goods legislation should not be considered in determining whether a person is a 'buyer' of personal property that has been 'sold' under PPSA s 46. The PPSA discloses no intention to displace the existing law relating to the sale of property (as opposed to the operation of security interests over property). When the PPSA refers to existing concepts such as the sale of property, and those concepts are not necessarily affected by the PPSA's reconfiguration of personal property securities law, there is no reason to suppose that the Parliament intended anything other than a reference to the accepted meaning of familiar concepts. Accordingly, it will be necessary to refer to various applicable sections of the Goods Act 1958 (Vic) ("Goods Act").

48 The following sections of the Goods Act are relevant:

(1) In this Part unless inconsistent with the context or subject-matter

...

specific goods means goods identified and agreed upon at the time a contract of sale is made;

...

(4) Goods are in a deliverable state within the meaning of this Part when they are in such a state that the buyer would under the contract be bound to take delivery of them.

(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration called the price. There may be a contract of sale between one part owner and another.

(2) A contract of sale may be absolute or conditional.

(3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer the contract is called a sale; but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled the contract is called an agreement to sell.

(4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.

...

Subject to section 25A, where there is a contract for the sale of unascertained goods no property in the goods is transferred to the buyer unless and until the goods are ascertained.

(1) Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.

(2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract the conduct of the parties and the circumstances of the case.

Unless a different intention appears the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer:

Rule 1. Where there is an unconditional contract for the sale of specific goods in a deliverable state the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment or the time of delivery or both be postponed.

...

49 Before answering the questions, it is convenient and perhaps more relevant to deal with the three factual scenarios submitted by counsel for the Suppliers. The answers to these scenarios will provide the necessary answers to the questions.

50 The first scenario is the sale by WHS - having purchased the Goods from the Suppliers on the terms referred to - to its retail customers.

51 In my opinion, the Suppliers do not have any security interest in goods sold by WHS to its retail customers other than layby sales because such sales were specifically authorised by the Suppliers and, other than layby sales, these sales took place.

52 The second scenario is the sale by WHS - having purchased the Goods from the Suppliers on the terms referred to - to WHS2.

53 In my opinion, the Suppliers (other than Panasonic) do not have any security interest in the Goods sold by WHS to WHS2 because these Goods were sold in the ordinary course of the business of WHS and such sale or disposition was authorised by the Suppliers other than Panasonic.

54 The third scenario is the same as the second scenario save that there is an on-sale to retail customers of WHS2.

55 Because the security interest (other than Panasonic) is extinguished following the sale or disposition to WHS2, the Goods (other than those supplied by Panasonic) are not subject to any security interest and purchasers from WHS2 are not affected. The position of Panasonic is different and is considered below.

56 Accordingly, the questions should be answered as follows:

Question 1 WHS2, other than goods supplied by Panasonic.
Question 2 No, other than goods supplied by Panasonic.
Question 3 Yes, other than layby sales.
Question 4 Yes
Question 5 Yes

57 The first scenario is the sale by WHS having purchased the Goods from the Suppliers on the retention of title terms referred to to its customers.

58 These sales, which according to the evidence take three different forms, are in the ordinary course of the business of WHS and are therefore specifically and expressly authorised by the Suppliers. However, in light of the submissions made, it is necessary to consider each form of sale separately.

59 Where the Goods have been paid for in full either by cash on pick up or cash before delivery and whether or not in the possession of WHS, the security interest is extinguished under s 32(1)(a)(i) of the PPSA because of the express authority given by the Suppliers. Further, the buyer takes the Goods free of such interest under s 46(1) of PPSA. In these circumstances and for the purposes of s 46(1) there is a sale. This is because there was an unconditional contract for the sale of specific goods in a deliverable state. The intention of the parties was that property in the Goods passed at the time the contract was made. Accordingly, pursuant to ss 6, 22 and 23 (Rule 1) of the Goods Act, there is a sale.

60 Where the Goods have been purchased on layby the position is different. Under the Goods Act there is no sale because property in the Goods is not transferred until payment is made in full. This condition and contemplated future event places these agreements in the agreement to sell category as contemplated by s 6 of the Goods Act. Consequently Goods purchased on layby that remain in the possession of WHS remain subject to the suppliers' security interests.

61 The final category is partly paid sales. The Suppliers argued that they were no different to layby sales. The contrary argument was also expressed.

62 In my opinion, partly paid sales do not fall into the same category as layby sales. The reservation of ownership clause in the Warehouse Sales Terms and Conditions of sales to retail customers, namely 'clause (j)', appears under the heading 'Layby Conditions'. They do not apply to other sales and in particular partly paid non layby sales. Under the Goods Act, which I have held to be applicable, there is a sale by WHS and the purchaser is protected by s 46(1) of PPSA. There is a sale because of the provisions of s 6, 22 and 23 (Rule 1) of the Goods Act. The position is the same as if the Goods were paid for in full. Section 23 (Rule 1) specifically contemplates property passing prior to full payment being made.

63 Section 32(1)(a)(i) is also applicable because there is a permitted disposal.

64 Despite some authority to the contrary, in my opinion the better view is that the Goods Act applies to the PPSA. As pointed out in paragraph 44, there is no reason why it should not apply and none was suggested. The terms 'buyer' and 'sold' and 'sale' are not defined in the PPSA and the Explanatory Memorandum is of no assistance in this regard.

65 In Royal Bank of Canada v 216200 Alberta Ltd[15] Vancise JA (delivering the judgment of the Saskatchewan Court of Appeal) held at paragraph 12:

I am of the opinion that before a buyer can take property free of the security interest of the appellant, he must establish that there has been a sale and that he is a buyer in the ordinary course of business. The application of the provisions of the Sale of Goods Act, while not being specifically referred to in s.30, must be referred to to determine whether or not there has been a sale.

66 In Willi v Don Shearer Ltd,[16] Hollinrake JA (delivering the judgment of the British Columbia Court of Appeal) expressed "some hesitation" in using the Sale of Goods Act when interpreting the words of the relevant legislation, but was not required to determine the point because the facts of the case established that it was the mutual intention of the relevant parties that title to the vehicle would pass at a particular time.

67 216200 Alberta was considered by the Ontario Court of Appeal in Spittlehouse v Northshore Marine Inc.[17] The Court declined to follow 216200 Alberta. Delivering its reasons, Grange JA held:

[9] ... This transaction is a sale with title withheld until the purchase price is fully paid. It is a device to protect the seller until full payment is made and no more. It is valid to the extent that the purchasers cannot demand the transfer of title until all of the purchase price is paid.

...

[12] In my opinion, the Sale of Goods Act, R.S.O. 1990, c. S-1, is not relevant or material to the resolution of our problem. Here, there was a sale with a seller and a purchaser who between them agreed that title in the goods would not pass until all purchase money was paid. The agreement between them states "the dealer agrees to sell and the buyer agrees to purchase" and refers "to the equipment being purchased" and that such equipment "is being sold". It cannot be regarded as anything but a sale. The Sale of Goods Act, R.S.O. 1990, c. S-1, may affect the time when property in the goods passes but it cannot change what is clearly a sale in another Act into something it is not.

68 In the Matter of the Bankruptcy of Anderson's Engineering Ltd,[18] the Supreme Court of British Columbia noted the apparent disagreement between the judgments in 216200 Alberta and Spittlehouse and followed the approach in 216200 Alberta.

69 Similarly, in Orix New Zealand Ltd v Milne,[19] the High Court of New Zealand applied the Sale of Goods At 1908 (NZ) to a transaction to determine that goods had been sold by one party to another. While his Honour Hansen J there held that it was logical to look to the sale of goods legislation because the New Zealand equivalent of s 46 (s 53 of New Zealand's Personal Property Securities Act 1999 (NZ)) was concerned with 'goods' and not with other species of personal property,[20] his Honour's reasoning would hold even if the New Zealand provision was not so confined, so long as the sale in question was a sale of goods.

70 Commentators support the 216200 Alberta approach. Professor Duggan and Associate Professor Brown have expressed the view that s 46 applies:

if personal property is 'sold' by a 'seller' to a 'buyer' and these terms must be read in light of the meaning ascribed to them by the sale of goods legislation ... In summary, a transaction qualifies as a 'sale' in the legal sense only when property in the goods passes to the buyer; in the period between the date of the contract and the date when property passes, the contract is merely an agreement to sell.[21]

71 In Canada, Cuming, Walsh and Wood are of the opinion that:

the approach of the Saskatchewan Court of Appeal [in 216200 Alberta] is technically more correct than that of the Ontario Court of Appeal [in Spittlehouse] and is the one that produces the most consistent results.[22]

72 Similarly, Harris and Mirzai prefer the 216200 Alberta approach on the grounds that 'the Sale of Goods Act, and not the PPSA, should determine what a sale is'.[23] They have suggested the most compelling reason why sale of goods legislation should be considered in determining whether a person is a 'buyer' of personal property that has been 'sold' under PPSA s 46: namely, that the PPSA discloses no intention to displace the existing law relating to the sale of property (as opposed to the operation of security interests over property). When the PPSA refers to existing concepts such as the sale of property, and those concepts are not necessarily affected by the PPSA's reconfiguration of personal property securities law, there is no reason to suppose that Parliament intended anything other than a reference to the accepted meaning of familiar concepts.

73 That logic is consistent with orthodox principles of statutory construction. When used in legislation, words that have a well-known legal meaning are presumed to carry that meaning unless a contrary intention clearly appears.[24] 'Sale', 'seller' and 'buyer' have longstanding meanings under the Goods Act and the substantially-uniform cognate legislation throughout Australia.[25] No contrary intention being found in the PPSA, the question of whether a person is a 'buyer' of property that has been 'sold' should be determined by reference to the relevant sale of goods legislation.

74 The second scenario is the sale by WHS having purchased the Goods from the Suppliers on the terms referred to to WHS2.

75 The critical question in relation to this scenario is whether these sales were of the kind comprising the ordinary course of the business of WHS and therefore specifically authorised by the Suppliers.

76 The reason why the determination of this question is critical is because s 32(1) (and s 46) will not give WHS2 the contemplated buyer's protection unless there is express or implied authority on the part of the Suppliers to dispose of or deal with the goods in the ordinary course of the business of WHS.

77 In these circumstances and unless there is a sale in the ordinary course of the business of WHS of selling goods of the kind sold to WHS2, s 20 will preserve the security interest over the collateral in the hands of the third party, namely WHS2.

78 There is no Australian authority that considers the meaning of the expression 'in the ordinary course of business' under the PPSA. Professor Gedye suggests that '[p]rimarily, the Australasian courts should look for guidance to North American precedents where the phrase has been used in the context of PPS legislation'.[26]

79 One context in which the concept is used is in insolvency and bankruptcy cases. In Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In liq)[27] Rich J, in considering the expression as it arose in s 95(2)(b) of the Bankruptcy Act 1924-1946, held at page 477:

that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation.

80 This approach was approved by Dixon CJ in Taylor v White[28] at page 136 where the Chief Justice said:

The time honoured phrase `in the ordinary course of business' is meant to refer to transactions regularly taking place in a sustained course of activity or some usual process naturally passing without examination.

81 Although these cases are useful and to some extent instructive, the context and relevant enquiry in relation to insolvency are different to the relevant enquiry in relation to the PPSA.

82 In Alberta Pacific Leasing Inc v Petro Equipment Sales Ltd,[29] the debtor was primarily involved in the business of leasing, repairing and rebuilding cranes. However, if a crane became obsolete or difficult to lease it would be sold. These sales were held to be in the ordinary course of business even though there were only one or two sales in the relevant year.

83 However, in the Replacement Explanatory Memorandum to the PPSA ("REM")[30] an example based on the facts in Alberta Pacific, suggests a different conclusion presumably because unlike Alberta, the Australian section (s 46) uses the words 'of that kind' when referring to the ordinary course of the debtor's business of dealing with property. In the example given, the cranes were leased in the ordinary course of the seller's business, and goods 'of that kind' were not ordinarily sold.[31]

84 In Saskatchewan Wheat Pool v Smith,[32] the court held that a cattle farmer whose primary business was dealing in cattle was conducting sales in the ordinary course of business when he regularly exchanged cattle for cattle food. This case is used as another example in the REM.[33]

85 This case, used as it is in the example given in the REM seems to suggest that a different, less used and subsidiary or secondary way of selling, where most of the goods are sold differently, can still be in the ordinary course of business if such a method or mode is engaged in with some regularity.[34]

86 In the earlier leading case of Fairline Boats Ltd v Leger,[35] the Ontario High Court of Justice held that 'in deciding whether a transaction is in the ordinary course of business, the courts must consider all of the circumstances of the sale. Whether there was a sale in the ordinary course of business was essentially 'a question of fact'.[36]

87 In Tubbs v Ruby,[37] the New Zealand Court of Appeal decided that the ordinary course of business rule applied to sales of timber for market value between related entities. The court said that the fact that the sales were to a related party was immaterial.

88 In Tubbs v Ruby 2005 Ltd CIV-2009-476-615 Chisholm J of the High Court of New Zealand said that there was no requirement that the buyer must have paid the price for the goods and that the analogous buyer protection section in the Personal Property Securities Act 1999 (NZ) (s 53) will protect a buyer on credit.[38] His Honour also stated at paragraph 59 that 'sale' should be given a liberal interpretation 'in recognition of the multiple ways in which commerce is transacted'. Any other interpretation was likely to undermine the purpose of the section.

89 In Stockco Limited v Gibson & Ors,[39] the New Zealand Court of Appeal held that the analogous provision, s 53 of the Personal Property Securities Act 1999 (NZ), required 'an objective factual assessment based on all the circumstances of the particular case'. The REM suggests that a similar approach is required under the PPSA:

Generally, this would be a question of fact in each case but a person would not take free in the ordinary course of the seller's business if the sale is made at a time of financial stress and the sale would not have been made but for the seller's financial stress.[40]

In the end the statutory words are everyday terms having common meaning and are reasonably clear in their own right. The hard part is applying them to the facts of the case. We do not think that the exercise is greatly assisted by applying the facts to similar but not identical wording.[41]

91 The Court held that the section needed to be interpreted in light of its purpose:[42]

to permit commerce to proceed expeditiously without the need for purchasers of goods to check into the titles of sellers in the ordinary course of their business ...[43]

What all of this tells us is that s 53 must be interpreted in a way which meets the commercial objective of facilitating commerce without undermining the equally important commercial objective of ensuring that those who provide credit on the security of the debtor's goods are not unfairly deprived of the benefit of that security.[44]

93 The Court adopted a two-stage process of analysis: first, identify what business was carried on by the seller in the ordinary course; and then, determine whether the sale was made in that ordinary course.[45]

94 In determining the business carried on by the seller, the Court held that it may be necessary to consider the business of each member of a group of companies of which the seller formed a part.[46]

95 In identifying the 'ordinary course', the Court held that '[t]he word 'course' suggests flow or continual operation'[47] and 'involves some anticipated repetition of business activities'.[48]

96 In determining whether the transactions in question were in the 'ordinary course', the Court considered several factors, including factors that had been considered in earlier Canadian cases:

(a) Where the agreement was made ("if the agreement is made at the business premises of the seller, it is more likely to be in its ordinary course of business.")[49]

(b) The degree of formality and any involvement of external advisers in the transaction.[50]

(c) Who the parties to the sale were ("if the buyer was an ordinary everyday consumer, as opposed to a dealer or a financial institution, then that would be more likely to indicate a sale in the ordinary course of business.")[51]

(d) The quantity of goods sold ("if one or a few articles are sold in the ordinary way, this was more likely to be in the ordinary course of business as compared with a sale of a large quantity perhaps forming a substantial proportion of the stock of the seller.")[52]

(e) The price charged ("a discounted price ... would also indicate against the sale being in the ordinary course ...")[53]

(f) The nature and significance of the transaction ("in particular, could it be carried out at a manager's own initiative without referring back to his or her superiors?")[54]

(g) The reason for the transaction ("in particular, was it in response to financial difficulties or in suspicious circumstances?").[55] That reason is supported by the REM, which states that a person would not take free in the ordinary course "if the sale is made at a time of financial stress and the sale would not have been made but for the seller's financial stress."[56]

(h) The frequency of the transaction.[57]

(i) The arm's length nature of the transaction.[58]

97 Professor Gedye points out four other factors that might be relevant:[59]

(a) Whether the seller advertises that it sells goods of the relevant kind.

(b) Whether the transaction "resemble[s] a liquidation of assets".

(c) Whether the intent or effect of the transaction was to undermine a security interest.

(d) Whether consideration for the transfer was the discharge of an existing liability.

98 Other than helpfully referring to the various authorities, the Plaintiffs make no further submissions.

99 The Suppliers contend that the unusual features of the sale from WHS to WHS2 including price, quantity and other features took such sales out of the category of the ordinary course of the business of the selling by WHS of goods of this kind.

100 The Director of Consumer Affairs submitted that given the integrated nature of the business of WHS, the sale from WHS to WHS2 was unremarkable and did not call for any comment.

101 The cases refer to many factors considered to be relevant in answering the required question. Ultimately it is a mixed question of fact and law. Of course, in the assessment process different factors might point in opposing directions.

102 In my opinion and although the issue is not free from difficulty and minds may differ, I consider that the sale of Goods from WHS to WHS2 was in the ordinary course of the business of WHS in the sense and context in which this condition was used by the parties.

103 First, the evidence establishes that WHS was engaged in the business of selling white goods. This business activity was not conducted exclusively as the basis of sales to retail mum and dad customers. The same goods were also sold in a different way, that is, through WHS2 to its retail customers. This represents a different mode of selling the same goods. This mode was regularly engaged in, not only to WHS2 but also others. It is no less a part of the ordinary business of WHS than the retail sales to customers despite being a small part of the business of WHS.

104 Secondly, the Saskatchewan Wheat Pool case, used as an example in the REM, provides some support for this view. In that case, dealing in cattle was not restricted to sales of cattle and included the other regular activity of exchanging cattle for food. The point is that the cattle was dealt with in different ways. So were the white goods in the case at hand. Both ways were part of the business.

105 Thirdly, it is the seller's (WHS's) way of doing business that is relevant. The seller may do business in a particular way that may not be consistent with the more general industry practice. It may engage in diverse or complementary activities. In Camco, a property developer sold appliances as a secondary or incidental part of its business which was primarily the sale of real estate. The Saskatchewan Court of Appeal held that the sale of the appliances was in the ordinary course of the business of the property developer. In the case at hand, the Goods sold were part of the same or primary line of business of WHS. They were sold as part of its business plan or model. The only difference, to the bulk of the retail sales, was price and quantity.

106 Fourthly, there are no factors that point to the unusual or extraordinary nature of the sales. The fact that the sales to WHS2 were less frequent than the bulk of the sales is not to the point. Whilst there may be cases where irregular or infrequent transactions call for comment and are not usual, this is not the case where the very Goods were regularly sold for the purpose of onsale or as part of a diverse and multifaceted - in a very limited way - business model. Again, price and quantity are the only factors that call for comment.

107 Although price is a relevant factor, the sale below market value at or the same price paid by the seller is not determinative. In my view, in this case, it is at best a neutral factor. Consistent with these reasons it must be emphasised that the price in relation to these sales differs from the price of goods sold to retail customers, given the different mode of sale undertaken by WHS. Also the quantities sold are entirely consistent with this part of the business model of WHS.

108 Fifthly, none of the other factors referred to affect this analysis. The reasons for the transactions are entirely cogent and explicable and consistent with the operation of the business of WHS. They do not represent an endeavour to do anything other than operate a business in a particular way. The point is that regular activity of whatever nature may become part of the ordinary business activities of a company in circumstances where had the activity been engaged in once it would call for comment. Further, it matters not whether a supplier is aware of such activity and the extent of the departure from the main business of the company.

109 Accordingly, s 32 applies because the Suppliers (other than Panasonic) expressly or impliedly authorised a disposal of the Goods in these circumstances.

110 Further, s 46 applies because the Goods were sold[60] in the ordinary course of the business of WHS in relation to the sale of goods of the kind sold.

111 The position of Panasonic is different. Panasonic provided no such authority and the sale of its goods to WHS2 was not authorised. In the circumstances, s 32 does not apply and s 46(2)(b) precludes reliance on s 46. The security interest held by Panasonic remains and extends to WHS2.

112 The third scenario is the sale by WHS2 - having acquired the Goods from WHS - to its customers as purchasers.

113 It follows from the analysis and conclusions in relation to Scenario 2 that retail customers of WHS2 are protected. They take free from any security interest. Of course the position of customers may vary depending on whether there is a sale. In this regard the analysis in scenario 1, so far as the Goods Act is concerned, is applicable. Accordingly, layby sales made by WHS2 are not relevantly sales and these Goods remain the property of WHS2.

114 The position of Panasonic may be different. Panasonic goods purchased on layby are not relevantly sales and these goods, in the possession of WHS2, remain subject to Panasonic's security interest. However, the position of retail customers of WHS2 in relation to the purchase of Panasonic goods may be different. Whether and to what extent, if any, the buyer protection provisions (ss 32 and 46) are available is not a matter that was specifically addressed by the parties. If the parties consider that the matter is of sufficient relevance, I will allow further submissions on the precise application and interaction between s 32 and s 46 in the circumstances referred to.

(a) Question 1 - WHS2, other than goods supplied by Panasonic.

(b) Question 2 - No, other than goods supplied by Panasonic.

(c) Question 3 - Yes, other than layby sales.

116 I will hear further from the parties in relation to the form of advice, order or other relief and costs.

LG ELECTRONICS AUSTRALIA PTY LTD (ACN 064 531 264)

FISHER & PAYKEL AUSTRALIA PTY LTD (ACN 000 042 080)

ELECTROLUX HOME PRODUCTS PTY LIMITED (ACN 004 762 341)

[1] Further Amended Originating Process dated 2 May 2014, paragraph 1(a).

[6] Hereinafter simply referred to as white goods.

[8] Waller v NZ Bloodstock Ltd [2005] NZCA 254; [2006] 3 NZLR 629; Graham v Portacom New Zealand Ltd [2004] 2 NZLR 528.

[9] See PPSA s 20 and 21.

[13] Professor Michael Gedye, 'A Hoary Chestnut Resurrected: The Meaning of "Ordinary Course of Business" in Secured Transactions Law' [2013] MelbULawRw 8; (2013) 37(1) Melbourne University Law Review 1, 4.

[14] The note may be used in ascertaining the meaning of the provision if necessary: Acts Interpretation Act 1901 (Cth) s 15AB(1), (2)(a).

[15] (1986) 33 DLR (4th) 80 (Saskatchewan Court of Appeal) ("216200 Alberta").

[16] (1993) 107 DLR (4th) 121 (British Columbia Court of Appeal).

[17] (1994) 114 DLR (4th) 500 (Ontario Court of Appeal) ("Spittlehouse").

[20] Orix New Zealand Ltd v Milne [2007] NZHC 507; [2007] 3 NZLR 637, 646.

[21] Anthony Duggan and David Brown, Australian Personal Property Securities Law (LexisNexis Butterworths, 2012) 209 [10.36].

[22] Ronald C.C. Cuming, Catherine Walsh and Roderick J Wood, Personal Property Security Law (Irwin Law, 2nd Ed, 2012) 389.

[23] Jason Harris and Nicholas Mirzai, Annotated Personal Property Securities Act (Wolters Kluwer CCH, 2nd ed, 2014) 213 [43.5.1].

[24] Attorney-General (NSW) v Brewery Employees Union of New South Wales [1908] HCA 94; (1908) 6 CLR 469, 531; Gamer's Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd (1985) 3 NSWLR 475, 483-484, 494.

[25] See LexisNexis Australia, Halsbury's Laws of Australia vol 389 (at May 2014) 375 Sale of Goods, '1 Sale of Goods Legislation' [375-5], '2 Extent of Statutory Regulation' [375-65], [375-70], 'II Formation and Terms of the Contract' [375-200].

[26] Above n 13, 22-23, relying on ORIX New Zealand Ltd v Milne [2007] NZHC 507; [2007] 3 NZLR 637, 648 [62].

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